How Much Can I Sell My Restaurant For?
“How Much Can I Sell My Restaurant For?” is a very common question that we hear from our restaurant business sellers.
As skilled and experienced restaurant brokers, we are qualified to price restaurants, franchises, quick-serve restaurants (QSR), nightclubs, cafes, delis and/or bars.
There are a few methods that you can use when calculating a base price for a restaurant. There are many variables that you need to take into account, but this is a good starting point to calculate the total cost to the buyer.
Total Cost to The Buyer
Let’s suppose you are interested in buying a restaurant in your local area but haven’t yet considered any particular establishments. The National Restaurant Association provides sales data that can be used to estimate a restaurant’s price.
Recent industry data shows that restaurants sell for an average price of $150,000. Restaurant prices can vary depending on the type and location. This will lead to higher startup costs. Based on many factors, the overall startup cost ranges from $250,000 to $500,000 as of 2020. While you may find something cheaper in your local area, it is better to assume a higher cost based on the location, real estate prices fluctuations and assets at the time.
Restaurant owners and investors will try to sell their restaurant for between 25-40% of their annual operating income. If the restaurant is earning $1 million per year, they will decide on a price for it, which would range from $250,000 to $400,000 Remember that $1 million in sales does not equal $1 million. Profit potential is eroded by the constant increase in labor costs, lease and food costs.
Seller’s Discretionary Earnings (SDE)
The seller’s discretionary earnings (or SDE) of a restaurant are, in essence, equivalent to a business’s net income. This is the pre-tax income after expenses have been deducted (profit), and includes the owner’s salary, as well as certain other expenses. The gross earnings of a business are the net earnings before taxes and costs are deducted.
A restaurant earning $100,000 per year is likely to sell for $196,000. A revenue multiplier of.39 would be used to calculate the expected selling price for a restaurant that has $500,000 in sales. Although the expected prices calculated using the SDE multiplier or revenue multiplier might seem similar, they are not always the same. You can calculate a reasonable range for what a restaurant should be priced using these two factors.
SDE multiples range from 1 to 3. SDE multiples range from 1 to 3. Restaurants tend to be on the lower end. This is because the restaurant industry can go under in as little as 4-5 years. A business’s multiple is determined by its assets, industry growth and transfer viability (likelihood that a business will be successful transferred from one owner to the next). A lower sales multiple is a result of fewer assets, industry stagnation and volatility, as well as high owner risk (click this link to learn more about multiples and how they work).
Assets In Place
Assets in Place Method for Valuation is used when the business isn’t making any money or is barely profitable. These types of purchases are usually for fixtures and equipment, leasehold improvements, leasehold improvements, and any licenses.
They don’t normally care about the name or menu. These buyers have their own concept and menu in mind. The ratio of sales price to assets in place is the pricing criteria.
Additional Factors
Other factors that determine the restaurant sales price include:
1) The lease value (whether it is at market, below or above market, and how long the lease lasts)
2) The potential upside to the business (i.e. If a business is currently serving dinner and only has a beer or wine license, there are potential opportunities for growth in the area. If there is a major development that will bring new customers to the area.
3). The equipment (how old, whether there are any leases, any upgrades needed)
4). Staff stability (how stable is the staff, any outstanding worker comp issues)
5). Location (how good is the location, how’s the competition).
Do I need to update my restaurant and equipment first?
Maybe. Of course, you should repair and/or replace and defective equipment. Otherwise, if your equipment is functional and you intend to sell within the next year, then probably not as you may not see a return on that investment.
So How Much Should I Sell My Restaurant For?
Don’t go it alone. Pricing a restaurant can be tricky. If you don’t know and want help, contact our restaurant brokers today to get your complimentary restaurant valuation.
Our brokers will analyze your financial statements and then obtain comparable restaurant business sales information to help you right price your restaurant business for a successful outcome.
